print 29.12.2006

CREDIT-RATING: Guidelines for Assigning Credit Ratings to Issuers Whose Housing Bond Issues Have Been Rated

Credit rating assignment to Issuers of zero-coupon (housing) bonds involves the investigation of the Issuers business environment, including in particular the analysis of the market environment, demand, consumers, and competitors. An analysis of the interior environment includes the analysis of financial and economic activity, efficiency of the administrative and financial management, assessment of the debt load, assessment of risks and the Issuers capability to reduce them, as well as analysis of the companys construction investment activity: the Issuers or the company groups experience in managing construction projects, the possibility of financial and other support from partners in the holding of the company group, promptness and quality of the construction work performed. 

A credit rating level also depends on the quality, uniformity and completeness of information provided by the Issuer or otherwise available to the rating agency.

On the basis of documents received, the analytical group suggests a tentative level of credit rating later to be submitted to a rating committee for discussion and approval. When making a decision the rating committee uses not only the information contained in a rating report but also data from other sources as well as the comparative database formed by the rating agency in the course of its operation to allow for peculiarities of issuance, servicing and redemption of zero-coupon (housing) bonds. 

Rating levels may also differ in + or signs which indicate an intermediary rating category compared to the standard category.  

Using its database and current methods, the Rating agency generalized the most typical features of Issuers of zero-coupon (housing) bonds characteristic by a certain credit rating. 

Speculative Grade Ratings

uaD-uaC credit rating level

These ratings include debt liabilities with the expectation of the borrowers default as a result of technical and legal procedures (in case of bankruptcy proceedings, ban on conducting business, expected closure of the borrower, judicial decision on the seizure of property or any other similar events). 

None of the zero-coupon (housing) bond Issuers has been assigned this rating by the rating agency.

uaCC credit rating level

This rating level includes debt obligations with a high possibility of the borrowers default on meeting its obligations in the Ukrainian financial market environment.

Main characteristics of these Issuers:

• A low level of business experience or no business experience;
• Lack of experience in construction investment;
• Short period of operation (up to 1 year, as a rule);
• No licensing documents entitling the Issuer to start construction;
• Amount of the bond issue is 20 times or even larger than the balance sheet total.

A sign in this category is attached to the rating level depending on the completeness of the license documents package.

As of November 23, 2006 the Rating Agency has assigned this level to 20 issues, or nine percent of all zero-coupon (housing) bond ratings.

uaCCC credit rating level

This rating level includes debt obligations with possibility of default in the Ukrainian financial market environment; however the timely fulfilment of debt obligations largely depends on favourable commercial, financial and economical conditions.

Main characteristics of these Issuers:

• A low level of business experience or no business experience.;
• Lack of experience in construction investment;
• Short period of operation (one to three years);
• Package of licensing documents entitling the Issuer to start construction given that the necessary financing is available;
• Start of initial construction work (fencing of the site, preparation of the foundation pit, delivery of construction machinery);
• Amount of the bond issue is 10-20 times greater than the total balance.

A sign in this category is attached to the rating level depending on the actual volume of conducted.

As of November 23, 2006 the Rating Agency has assigned this level to 80 issues, or 36 percent of all zero-coupon (housing) bond ratings.

uaB credit rating level

This rating level includes debt obligations with higher possibility of default than uaBB rating in the Ukrainian financial market environment, however in this case the borrower is capable of fulfilling its obligations.

Main characteristics of these Issuers:

• Lack of experience in construction investment, while the construction of the facility to be financed through the bond issue is 30-50 percent complete;
• Experience in construction investments (completion of one facility at least), while the project to be financed through the bond issue is being constructed;
• Period of operation of three to four years;
• Amount of the bond issue is 2-10 times greater than the total balance.  

A sign in this category is attached to the rating level depending on the actual volume of construction work carried out. In addition, the sign might be effected by the efficiency of the Issuers financial and economic activity and presence of any other type of business which may serve as additional source of financing for the current construction project (at the moment of the bond issuance).

As of  November 23, 2006 the Rating Agency has assigned this level to 75 issues, or 34 percent of all zero-coupon (housing) bond ratings.

uaBB credit rating level

This rating includes debt obligations least affected by the risk of default among the speculative ratings. 

Main characteristics of these Issuers:

• Experience in construction investments (completion of more than one facility at least), while the project to be financed through the bond issue is in the process of being constructed;
• Period of operation of over five years;
• Amount of the issue is twice greater than the total balance;
• Issuer is one of the leading developers in its region;
• Issuers membership in a powerful group or holding whereas it acts only as a nominal land user with all licensing documents registered in its own name;
• Available capabilities to partially service the construction and project process.

A sign in this category is attached to the rating level depending on the efficiency of the Issuers work in the construction sector, as well as the actual state of the construction facility which is to be financed through the scheduled bond offering.

As of November 23, 2006 the Rating Agency has assigned this level to 34 issues, or 15 percent of all zero-coupon (housing) bond ratings.

All the above credit ratings are of a speculative grade level. This summer additional characteristics for speculative grade credit ratings were established to characterise a maximum possible delay in the fulfilment of obligations due to the rescheduling of the construction project management.

uaBB credit ratings imply the possibility of full redemption within 6 months after the ending date set for the issue in the event of delay in the management of construction project which is to be financed with the housing bonds.

uaB credit ratings imply the possibility of full redemption within 12 months after the ending date set for the issue in the event of delay in the management of construction project to be financed with the housing bonds.

uaCCC, uaCC and uaC credit ratings imply that the delay in their full redemption might exceed 12 months after the ending date set for the issue in the event of delay in the management of the construction project which is to be financed with the housing bonds.

Investment Grade Ratings

uaBBB credit rating level

This rating includes debt obligations which indicate the borrowers adequate capacity to fulfil in time and full this debt obligation in the Ukrainian financial market environment.

Main characteristics of these Issuers:

• Extensive experience in construction investment, in particular in the management of large-scale projects;
• Completion of construction projects on schedule;
• Period of operation over 5 years as a rule;
• Amount of the issuance is equal or lower than the total balance;
• Issuers membership in a powerful group or holding whereas it acts only as a nominal land user with all licensing documents registered in its own name (which reduces the impact of such factors as a low level of working experience, a low level of supply of own capital, etc.);
• Issuer has all production capacities and structural subdivisions necessary to service construction process at practically all stages as well as partially provide it with self produced building materials;
• Issuer is one of the leading developers in its region.

As of  November 23, 2006 the Rating Agency has assigned this level to 14 issues, or six percent of all zero-coupon (housing) bond ratings.

uaA-uaAAA credit rating level

This rating level includes debt obligations with high (uaA), very high (uaAA) and exceptional capability (uaAAA) of the borrower to fulfil in time and fully this debt obligation in the Ukrainian financial market environment.

The rating agency has not assigned this credit rating so far to any zero-coupon (housing) bond issuer due to high system risks in the residential real estate construction market.

It should be noted that a credit rating is not a static value and has a long-term character which accounts for possible future changes in the Issuers operation and management of construction projects which are to be financed through zero-coupon housing bond issue. 

In the course of monitoring of the credit rating of a debt obligation for housing bonds, the credit rating may undergo changes. This is due in the first place to meeting of the deadlines for the construction work which is to be financed through housing bonds, or experience in completing another unrated facility. 

Andriy Kulik, Head of Department for Rating Monitoring,
Dmytro Zadesenets, Head of Department for Ratings of Oil-and-Gas, Agricultural and Construction Sectors